Mueller, Andreas and Storesletten, Kjetil and Zilibotti, Fabrizio (2019) Sovereign Debt and Structural Reforms. The American Economic Review, 109 (12). pp. 4220-4259. DOI https://doi.org/10.1257/aer.20161457
Mueller, Andreas and Storesletten, Kjetil and Zilibotti, Fabrizio (2019) Sovereign Debt and Structural Reforms. The American Economic Review, 109 (12). pp. 4220-4259. DOI https://doi.org/10.1257/aer.20161457
Mueller, Andreas and Storesletten, Kjetil and Zilibotti, Fabrizio (2019) Sovereign Debt and Structural Reforms. The American Economic Review, 109 (12). pp. 4220-4259. DOI https://doi.org/10.1257/aer.20161457
Abstract
We construct a dynamic theory of sovereign debt and structural reforms with limited enforcement and moral hazard. A sovereign country in recession would like to smooth consumption. It can also undertake costly reforms to speed up recovery. The sovereign can renege on contracts by suffering a stochastic cost. The Constrained Optimum Allocation (COA) prescribes non-monotonic dynamics for consumption and effort and imperfect risk sharing. The COA is decentralized by a competitive equilibrium with markets for renegotiable GDP-linked one-period debt. The equilibrium features debt overhang: reform effort decreases in a high debt range. We also consider environments with less complete markets.
Item Type: | Article |
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Uncontrolled Keywords: | Debt Overhang, Default, Dynamic Principal-Agent Model, European Debt Crisis, Markov Equilibrium, Moral hazard, Renegotiation, Risk premia, Sovereign Debt, Structural Reforms |
Subjects: | H Social Sciences > HB Economic Theory |
Divisions: | Faculty of Social Sciences Faculty of Social Sciences > Economics, Department of |
SWORD Depositor: | Unnamed user with email elements@essex.ac.uk |
Depositing User: | Unnamed user with email elements@essex.ac.uk |
Date Deposited: | 04 Jul 2019 14:46 |
Last Modified: | 30 Oct 2024 16:34 |
URI: | http://repository.essex.ac.uk/id/eprint/24888 |
Available files
Filename: MSZ_RIS_190529.pdf